Post-Stock Crash Optimism Revives Leveraged Buyouts

The high-priced blockbusters may be far and few between, but leveraged buyouts have reasserted their prominence as a corporate takeover strategy.

The transactions, in which investors buy a company mainly with borrowed money rather than their own cash or stock, have benefited from easing interest rates, an abundance of buyout financing and a renewal of economic optimism that had slumped after the stock market’s crash.

As in past years when leveraged buyouts held sway as one of corporate America’s hottest investment and takeover tools, such deals are again being spurred by the availability of billions of dollars earmarked for buyout funding.

But a number of participants contend that the current crop of deals will tend to emphasize economically sound transactions rather than highly speculative proposals financed by “junk bonds” that were common in recent years.

“We’re back in a much more sane kind of atmosphere,” said Theodore J. Forstmann, a general partner of Forstmann, Little & Co., a specialist in leverage buyouts. “Now the players will be real players with real business objectives.”

In addition to the multibillion-dollar buyout funds amassed by players such as Kohlberg, Kravis & Roberts, Morgan Stanley Group and Forstmann Little, scores of others have raised pools totaling hundreds of millions of dollars for buyouts of small- and medium-size companies.

There also has been wide speculation that Federated Department Stores may attempt a leveraged buyout to thwart the hostile $4.2-billion tender offer by Campeau Corp., and a management-led group has a pending $1.6-billion offer for GAF Corp.

The risks and potential returns from the strategy can be great.

Investors put up relatively little of their own money for the purchase, magnifying profits made by selling the company piecemeal or by later taking it public again through a stock offering.

But buyers also assume that they will be able to sell the company’s assets for a certain price or that cash flow will meet levels necessary to meet their debt payments.

The stock market collapse scared away many buyers who expected a post-crash economic slowdown that could hamper cash flows and make it tougher to sell corporate properties. Such pessimism also drove up the cost of the speculative, high-yield bonds--known as junk bonds--used to finance many buyouts.

But since a post-crash slump, the pace of deal making has picked up as confidence among lenders has risen that the economy will remain strong enough to support the debt loads undertaken by the acquired companies.